USD/CAD sees more downside below 1.3500 as Oil prices rally

• USD/CAD slides further to near 1.3500 amid a strong Oil price rally.
• The Fed is widely anticipated to start reducing interest rates in September.
• US Durable Goods Orders grew at a robust pace of almost 10% in July.

The USD/CAD pair extends its downside to near the psychological support of 1.3500 in Monday’s New York session. The Loonie asset weakens as a stellar upside move in the Oil price has strengthened the Canadian Dollar (CAD). The Oil price on NYMEX has gained more than 7% since Thursday amid escalating tensions between Iran and Israel in the Middle East. Growing tensions in the Middle East have prompted fears of Oil supply disruptions.

Meanwhile, the US Dollar (USD) delivered a mild recovery move after the release of the upbeat United States (US) Durable Goods Orders data for July. New orders for Durable Goods rose at a robust pace of 9.9% from the estimates of 4%. The economic data contracted significantly in June. The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, recovers mildly after posting a fresh year-to-date (YTD) low of 100.53.

However, the near-term outlook of the US Dollar remains vulnerable as market participants appear to be confident about the Federal Reserve (Fed) to begin reducing interest rates from the September meeting.

The confidence of investors for Fed rate cuts in September has increased after Fed Chair Jerome Powell unambiguously said in his speech at the Jackson Hole (JH) Symposium on Friday, “The time has come for policy,” given that the central bank is now worried about growing risks to labor market. Powell added, " We will do everything we can to support a strong labor market." While the confidence of the Fed that price pressures sustainably return to banks’ target of 2% has increased.

For fresh cues on interest rates, investors will focus on the US core Personal Consumption Expenditure Price Index (PCE) data for July, which will be published on Friday. The underlying inflation data will significantly influence market expectations for the likely size of Fed interest rate cuts in September.